The Indian Income Tax Act allows for certain deductions which can be claimed to save tax at the time of filing of Income Tax Return by all classes of Taxpayers (i.e. Salaried Individuals, Professionals, businessman etc). These deductions which help in saving tax are only available if the taxpayer has done proper tax planning during the year.
If an Individual has done proper Tax Planning to save tax, such deductions would be subtracted from the gross total income and income tax would be levied on the balance income as per the income tax slabs in force.
- Recommended Read: Income Tax Slab Rate
8 Most Effective Ways to save Tax
1. Save Tax under Section 80C, Section 80CCC, Section 80CCD
To promote the culture of savings and to direct the savings of the common man into the rightful resources, the Govt allows certain deductions provided the amount saved is invested in the Instruments as specified in Section 80C, Section 80CCC & Section 80CCD.
The maximum combined deduction allowed under these 3 sections is Rs. 1,50,000. If you’ve done proper tax planning during the year, you can claim these deductions to save tax by investing under any of these sections alone or in combination but the total deduction allowed would be limited to Rs. 1,50,000 only.
There are many instruments which are specified by the Govt through which tax planning can be done and these investments can be claimed as a deduction to save tax. The most popular instruments for investing for the purpose of tax planning to save tax are:-
- PPF Accounts
- 5 Year Tax Saving Fixed Deposit
- Equity Oriented Mutual Fund
- Pension Plans
- Contribution to Employee Provident Fund
- Life Insurance Policy
- National Savings Certificate (NSC)
All Tax Planning Options to save tax specified below are over and above the Rs. 1,50,000 deduction allowed under Section 80C, 80CCC & Section 80CCD as specified above.
An additional deduction of Rs. 50,000 under Section 80CCD has also been introduced for Investment in National Pension Scheme (NPS). This additional deduction has been introduced vide Finance Act 2015 (Budget 2015) and is applicable from Financial Year 2015-16 onwards.
2. Save Tax under Section 80D, Section 80DD, Section 80DDB
The Income Tax Act also allows for deductions to save tax if the expenditure has been made by the taxpayer for insuring his own health or the health of his relatives. Different amount of deductions are allowed under each of these sections which help in tax saving depending on the type of Insurance Policy which is as follows:-
- Section 80D: Medical Insurance Premium of Self or Spouse or Children
- Section 80DD: Medical Treatment of Handicapped Dependents
- Section 80DDB: Treatment of Specified Diseases
3. Tax Planning through Home Loan
If you have taken a Home Loan, you are allowed to claim deduction for repayment of principal amount of home loan u/s 80C.
Moreover, you are also allowed to claim deduction of interest paid on home loan under section 24. The maximum deduction allowed in some cases is Rs. 2,00,000 and in some cases there is no maximum limit of claiming this deduction for payment of interest on home loan.
Tax planning for the purpose of saving tax by taking a Home Loan is highly advisable as the Deduction allowed for repayment of home loan can be claimed under 3 different sections resulting in huge tax savings to the taxpayer.
- Recommended Read: Tax Benefits of Home Loan
4. Save Tax through Education Loan u/s 80E
If a taxpayer has taken an education loan for the higher education of himself or spouse or children or the student of whom he is the legal guardian, he can claim deduction under Section 80E and save taxes.
This deduction is only allowed for the repayment of interest and not for the repayment of principal amount of education loan. There is no maximum limit for claiming deduction under section for the repayment of interest on education loan. Deduction under Section 80E is only available for Individual taxpayers and not to HUF
- Recommended Read: Income Tax Deduction for Education Loan
5. Tax Planning under Section 80CCG: RGESS
A taxpayer having annual income of less than Rs. 12 Lakhs p.a. is allowed an additional deduction under Section 80CCG for investing in Shares of specified companies and specified Mutual Funds. This Deduction is called the Rajiv Gandhi Equity Saving Scheme.
This is a very complicated scheme and deduction is only available to first time investors and those who have earlier invested in Shares/Mutual Funds are not eligible for to make use of this deduction for doing tax planning to save tax.
- Recommended Read: All about RGESS
6. Tax Planning of Long Term Capital Gains
If any Long Term Capital Gain is arising to a taxpayer from the sale of any Long Term Capital Asset, he can claim exemption from paying such Capital Gain Tax if he invests the amount of gain from sale of property in specified instruments. Any Asset is considered as a Long Term Capital Asset if that asset was held by the taxpayer for more than 3 years.
This Exemption is considered very beneficial while doing the Tax Planning to save income tax of a taxpayer.
- Recommended Read: Exemption from payment of Long Term Capital Gains Tax
7. Income Tax Deductions for Donations u/s 80G
If a taxpayer makes a donation for charity, social or philantrophic purpose or makes a contribution towards National Relief Fund, then this donation can be claimed as a deduction u/s 80G of the Income Tax Act.
The Finance Ministry has pre-specified the organisations to which the taxpayer can make the donations and deduction allowed depends on the purpose for which the donation has been made.
In some cases, 100% of the donation made is allowed to be claimed as a deduction whereas in certain cases only 50% of the donation made is allowed to be claimed as a deduction for the purpose of saving taxes.
Donations made in kind are not allowed to be deducted. Only the deductions made through cash or cheque are allowed to be deducted.
For deductions made through cash, only Rs. 10,000 would be allowed to be claimed as a deduction. For claiming deductions above Rs. 10,000, the taxpayer would have to make the donation through cheque (Inserted by Budget 2012)
- Recommended Read: Deductions allowed for Donations under Section 80G
8. Long Term Capital Gains from the Sale of Equity Shares
To encourage the public to invest in equity shares and mutual funds, the govt has exempted income tax on the long term gains arising from the sale of equity shares, provided that these shares were held for a period of more than 1 year). If the shares are held for a period which is less than 1 year, tax would be levied @ 15%
- Recommended Read: Computation of Capital Gains Tax
There are several other ways to save tax as well (like Section 80GG, Section 80U, Section 80GGC etc) but they can’t be applied in case of a common man to help him do his Tax Planning.
Recommended Books to save/ reduce your Income Tax Liability
There are several legal ways to reduce and save your Income Tax Liability in India. The people who know these tax saving techniques are able to save lakhs of rupees by reducing their income tax liability whereas others who dont know these tax saving techniques end up paying a lot in taxes.
It is always good to pay your taxes on time to the Govt but not overpay your taxes.
The above mentioned ways are a synopsis of the most popular ways of saving taxes. To read more about the various ways to save Tax legally in India – there are a couple of books which are certainly worth a read as they will certainly help you save lakhs of rupees in taxes every year.
I would recommend the following 2 books to readers who are interested in reducing their income tax liability:-
Both these books have been written in very simple words by renowned author Subhash Lakhotia who also has a show by the name of Tax Guru which is aired on both CNBC TV 18 as well as CNBC Awaaz.